Aldrich Plan (1910)

Following the near catastrophic financial disaster of 1907,
the movement for banking reform picked up steam among Wall Street
bankers, Republicans, and a few eastern Democrats. However, much
of the country was still distrustful of bankers and of banking in
general, especially after 1907. After two decades of minority
status, Democrats regained control of Congress in 1910 and were
able to block several Republican attempts at reform, even though
they recognized the need for some kind of currency and banking
changes. In 1912 Woodrow Wilson won the Democratic party's
nomination for President, and in his populist-friendly acceptance
speech he warned against the "money trusts," and advised that "a
concentration of the control of credit...may at any time become
infinitely dangerous to free enterprise" (Grieder, 275).

Also in 1910, Senator Nelson Aldrich, Frank Vanderlip of
National City (Citibank), Henry Davison of Morgan Bank, and Paul
Warburg of the Kuhn, Loeb Investment House met secretly at Jekyll
Island, a resort island off the coast of Georgia, to discuss and
formulate banking reform, including plans for a form of central
banking. The meeting was held in secret because the participants
knew that any plan they generated would be rejected automatically
in the House of Representatives if it were associated with Wall
Street. Because it was secret and because it involved Wall
Street, the Jekyll Island affair has always been a source of
conspiracy theories. But the conspiracy theorists overestimate
the significance of the meeting. Everyone knew Wall Street
wanted reform, and the Aldrich Plan which the meeting produced
was, in fact, rejected by the House.

The Aldrich Plan called for a system of fifteen regional
central banks, called National Reserve Associations, whose
actions would be coordinated by a national board of commercial
bankers. The Reserve Association would make emergency loans to
member banks, would create money to provide an elastic currency
that could be exchanged equally for demand deposits, and would
act as a fiscal agent for the federal government. The Aldrich
Plan was defeated in the House as expected, but its outline
became a model for a bill that eventually was adopted.

The problem with the Aldrich Plan was that the regional
banks would be controlled individually and nationally by bankers,
a prospect that did not sit well with the populist Democratic
party or with Wilson. The Democrats and Wilson were not opposed
to banking reform, nor were they opposed to a form of central
banking. They were fearful that the reforms would grant more
control of the financial system to bankers, particularly to the
Wall Street crowd. They also remembered their history: the
First and Second Banks of the United States were brought down in
part by foreign ownership of the Banks' stock, a fear of
centralized power, and because the Banks competed with the
private banks they were regulating. A return to central banking must
not be accompanied by those features.